I've been around the dial so many times,
But you're not there.
Somebody tells me that you've been taken off the air.
Well, you were my favorite D.J.,
Since I can't remember when.
You always played the best records,
You never followed any trend.
F.M., A.M. where are you?
You gotta be out there somewhere on the dial.
On the dial.
Kinks, Around the Dial
DATELINE: March 20, 2008, Chicago
A dispute has been brewing in Minnesota for the past three and half years over a November 2004 decision by St. Olaf College to sell radio station WCAL to Minnesota Public Radio for a reported $10.5 million. SaveWCAL, a Minnesota nonprofit corporation organized to save WCAL, tried to stop the transaction, but was unsuccessful.
Following the sale, St. Olaf petitioned the Rice County District Court to release certain restrictions on endowed funds designated for WCAL's support, claiming that it was now impossible to honor the restrictions because the college no longer owned the station. Talk about trying to lift yourself by your own bootstraps. Once again, SaveWCAL tried to intervene. This time...
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Judge Gerald J. Wolf granted the group standing. SaveWCAL has asked the court to declare the WCAL sale to MPR void.
When St. Olaf submitted its petition to lift the restrictions on charitable gifts that were for the benefit of WCAL, it gave notice of its filing to the Minnesota Attorney General, as required by statute. The attorney general has disputed some of St. Olaf's assertions. Most notably, the attorney general believes that when a gift is made for a specific purpose and the donor purchases an asset consistent with that purpose, uses the asset for a certain period of time, and then later sells the assets, the proceeds of the sale are still subject to the sale. St. Olaf argues otherwise, claiming that restrictions on gifts lapse after a reasonable period of time.
Judge Wolf appointed Gary J. Meyer as Special Master to determine the facts and make recommendations to the court. On March 7, 2008, the special master delivered his Findings of Fact, Recommended Conclusions of Law, Memorandum, and Recommended Order.
The Special Master advised the court that it should not impose a charitable trust over the proceeds from the MPR-WCAL sale, which now have a market value in excess of $13.7 million. In other words, those funds would now be unrestricted--certainly not a good recommendation from saveWCAL's point of view. The Special Master reached this conclusion because a significant portion of WCAL's activities were financed by St. Olaf. We are not certain that we agree with the Special Master's reasoning. He seems to be saying that it was impossible to trace specific portions of the $13.7 million in expenditures back to their specific funding sources. As a consequence, the Special Master could not determine whose dollars financed what. In our minds, it does not follow that all amounts are therefore unrestricted. We suspect that an allocation formula could be developed.
Nothwithstanding that recommendation, SaveWCAL viewed the Special Master's report as a victory because there he made some favorable recommendations from their standpoint. For example, the Special Master did conclude that because the station's transmission tower was completely financed by listener contributions, St. Olaf has an obligation to set aside $2.5 million of sale proceeds as a permanent endowment for "Core WCAL Activities," a mysterious and loosely defined term that keeps appearing in the documents. [Paragraph 9, Recommended Conclusions of Law]
The Special Master treats another $370,570 of value attributed to undocumented gifts as permanent endowment. Rather than adopt St. Olaf's view that the absence of documentation creates a presumption of no restrictions, the Special Master applied a different presumption: The absence of documentation should imply that the funds are subject to restrictions if that is how the institution has consistently treated the funds. [Paragraph 3, Recommended Conclusions of Law]
The Special Master addressed some smaller funds that were restricted for the benefit of WCAL. He recommends that Judge Wolf release these restrictions to the extent that they were for the benefit of WCAL, but he then subjects them to restrictions for the benefit of the Core WCAL activities. In several instances, he defines these core activities. For example, he recommends using the income for the specific purpose of acquiring recording equipment to produce programs of special interest for seniors, and in another case, he recommends that income be used for scholarship funds for students studying organ.
The Special Master also addressed a $4.050 million gift from Leonard Hoeft, a St. Olaf alum. In looking at the record, the Special Master recommended that $1,475,611.33 should be treated as restricted for the benefit of WCAL, but $475,611.33 of that amount has already been accounted for in Paragraph 9, Recommended Conclusions of Law. [Paragraph 11, Recommended Conclusions of Law]
Now we come to what is the most startling aspect of the Special Master's report. When St. Olaf acknowledged certain gifts to WCAL, it indicated to the donors or their representatives that it would treat them as permanently restricted endowment. It asked the court to confirm that those gifts are no longer subject to restrictions. To support this position, St. Olaf pointed to Generally Accepted Accounting Principles (GAAP), arguing that FASB Statement No. 116, Accounting for Contributions Received and Contributions Made, stands for the proposition that "if an expense is incurred for a purpose for which both unrestricted and temporarily restricted net assets are available, a donor-imposed restriction is fulfilled to the extent of the expenses incurred unless the expense is for a purpose that is directly attributable to another specific external source of revenue." Well that is nice and it may reflect a correct reading of the law, but searching for the law in GAAP is inappropriate. Our very own Jack Siegel has authored an article on proposed FASB Staff Position 117-a, which addresses accounting for nonprofit endowments. Although the article, which is scheduled to appear in the April edition of the Exempt Organization Tax Review (and possibly also an accounting publication), addresses a slightly different set of issues, Jack sets out four principles, one of which is equally applicable here. Jack writes:
- PRINCIPLE 1: Law defines consequences; accountants report those consequences. Accountants are charged with reporting facts, usually financial in nature. To report certain financial facts, it is necessary to understand legal rights, limitations and restrictions. In reporting facts, accountants should refrain from creating legal constructions that are expedient for accounting purposes, but that do not accurately portray the economics and relationships. In other words, the financial statements must give substantial economic effect to the legalities.
There are serious problems with how GAAP accounts for endowments. These problems stem from the fact that GAAP sees legal requirements and duties where none exist and refuses to recognize other legal duties that do exist. For example, endowment funds subject to the Uniform Management of Institutional Funds Act (UMIFA) almost always overstate unrestricted assets if there has been net appreciation above the fund's historic dollar value.
The Special Master quotes language from FASB Statement No. 116, the purpose of which is limited to assembling financial statements. That language may or may not correctly recognize how the law views which funds are expended or released from restrictions. This is a legal question and GAAP is irrelevant in answering it. Since when do lawyers look to accountants for legal guidance in ascertaining the law? In short, the Special Master's recommendations with respect to what he refers to as the Exhibit B-2 gifts rest on a faulty foundation. If these funds were truly permanently restricted endowment, we would assume that the law would treat the endowment as expended last rather than first. Moreover, we would expect the focus to be on the income from the fund rather than a "principle."
A the end of the day, if Judge Wolf adopts the Special Master's recommendations, somewhere around $4 million will be restricted to Core WCAL Activities. This obviously is a psychic victory for WCAL. We are not sure, however, where all this leads to because we still don't have a sense of what anybody means by Core WCAL Activities. We certainly don't see these purposes as leading to WCAL's resurrection if the Core WCAL activities include scholarships, buying equipment, and conducting special programs for the elderly. Those are all nice uses, but they certainly don't necessarily point to a radio station.
We have read a fair amount of the voluminous record in this case. We will hold final analysis and judgment until Judge Wolf renders a decision. We have to say that there is a great deal of confusion evidenced by all the parties when it comes to charitable trusts, nonprofit corporations, cy pres, UMIFA, restricted gifts, and GAAP. Thank god Minnesota hasn't adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA). We have read many comments in the various court filings and memoranda that strike us as just plain wrong. In general, our sense is that St. Olaf made some far-fetched arguments, including the notion that restrictions automatically lapse after a reasonable period of time. To that, all we can say is, "If only that were the case." We suspect our friends at Fisk University would agree with us. They have just spent the last few years trying to get a Tennessee court to release restrictions that are now close to 60-years old so that Fisk can sell two paintings.
The parties would do well to read Professor Evelyn Brody's recent Georgia Law Review article, "From the Dead Hand to the Living Dead: The Conundrum of Charitable-Donor Standing," in which she concludes that in the nonprofit corporation setting, it is not necessary to find a charitable trust to enforce restrictions.
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